Slug: /glossary/grantor-trust Title tag: What Is a Grantor Trust? Definition & Tax Rules | CitizenX Meta description: A grantor trust is a trust whose income is taxed to the person who created it, not to the trust. Here is how it works and why it matters offshore. Target: grantor trust (4,000/mo, KD 5)
A grantor trust is a trust whose income, deductions, and credits are taxed directly to the person who created it, as if the trust did not exist. The trust files no meaningful tax return of its own. The grantor (also called the settlor) reports everything on their personal return, whether or not they actually receive a distribution.
The label comes from US tax law, specifically sections 671 through 679 of the Internal Revenue Code. A trust becomes a grantor trust when the person who funds it keeps certain strings attached: the power to revoke it, the right to receive income, the ability to swap assets, or, for foreign trusts, simply having any US beneficiary at all. Section 679 is the one that catches international planning: almost any foreign trust created by a US person with US beneficiaries is a grantor trust by default, no matter how the deed is written.
This surprises people who assume offshore trusts cut tax bills. They almost never do, and that is by design. A Cook Islands trust or Nevis trust settled by a US person is deliberately structured as a grantor trust so that the tax result is neutral: the settlor pays exactly what they would have paid holding the assets personally. What the structure buys is asset protection and succession, not a smaller tax bill. The paperwork still exists, though. US grantors of foreign trusts file Forms 3520 and 3520-A every year, and the penalties for skipping them start at US$10,000.
The opposite category is a non-grantor trust, which pays tax as its own entity. The distinction matters most at two moments: when a settlor dies (grantor trusts generally become non-grantor trusts) and when a non-US person creates a trust for US children, which produces the friendlier foreign grantor trust treatment while the settlor is alive.
Related terms: settlor, discretionary trust, trust deed.